Navigating The Mortgage Maze

08 October 2008

Navigating The Mortgage Maze

Over recent months, newspaper headlines have painted a rather gloomy picture for UK homeowners. Many commentators have speculated about the future of house prices, while others have reported the rising costs of mortgages. Cheltenham & Gloucester have put together a few tips for first time buyers.

It is true to say that the mortgage market has changed over the past 18 months. Back in 2006, borrowers were enjoying low mortgage rates, many even lower than the Bank of England base rate, and there was an abundance of mortgage providers fighting for business. Today the environment looks different – there are fewer lenders actively competing in the market and the cost of funding mortgages has risen steadily. As a result, consumers have seen mortgage rates increase and many are facing increased payments when they come to remortgage from their existing deals.

After a decade of rapid house growth and cheaper mortgage costs, many homeowners are facing a slowing housing market for the first time. It will be no surprise to learn that these changing economic conditions have caused many consumers to take a more cautious approach, resulting in a new breed of ‘wait and see’ homeowners, who are eager to see what happens to the economy before they make any decisions.

Many homeowners blame a lack of economic knowledge for this reluctance to take action. Almost half (49 per cent) questioned by Cheltenham & Gloucester believed they had insufficient economic know-how to make decisions in the current climate, with more than two-thirds of respondents describing their economic awareness as basic or below.

But doing nothing can be a false economy and could end up costing homeowners more in the long run. For example, if you don’t arrange a new mortgage deal before your current one expires you will automatically be moved onto the standard variable rate (SVR), which could be more expensive than your existing deal.

So whether you are looking to remortgage, move home or buy your first house, here is a step-by-step guide to taking control of your mortgage.

Take charge of your mortgage

1. The most important thing is to start shopping around early. Start speaking to lenders well before your existing deal expires and don’t leave it until the last minute. Despite the negative headlines, there are still good mortgage deals out there for consumers, so do go and seek advice. If you find a good rate now, but your current deal does not expire for a few months, most lenders will let you book the rate in advance. It may incur a charge, but some homeowners will think this is worth it, if they believe mortgage rates will continue to rise.
2. Most existing homeowners will have built equity in their property over time but, if you are a first-time buyer, start saving towards a deposit. Having a deposit will enable you to benefit from the best rates – the deposit required is typically around 10 per cent of the property’s value.
3. If you are remortgaging, the environment will look quite different from the last time you took out a deal, so be prepared for your payments to increase. But lenders are aware of these changes and, as a result, they have been developing products to help homeowners adapt to this new rate environment.
4. Your mortgage payments are a substantial part of your monthly outgoings, so it’s important to work out your priorities. Some consumers may prefer the security of a fixed-rate product, which allows them to set a budget over the long term. Other homeowners may want to benefit from potential rate drops, so would be better suited to a tracker product.

5. Make sure you take into account all the elements of a mortgage offer and not just the rate. Look at the package as a whole – that includes the fees, the length of tie-in and the opportunity to earn rewards such as AIRMILES or cash back.